Real and nominal rates interest Zane Perelli currently has $96 that he can spend today on socks costing $2.40 each. Alternatively, he could invest the $96 in a risk-free U.S. Treasury that is expected to earn a 8% nominal rate of interest. The consensus forecast of leading economists is a 4% rate of inflation over the coming year. a. How many socks can Zane purchase today? b. How much money will Zane have at the end of 1 year if he forgoes purchasing the socks today and invests his money instead? (Ignore taxes.) c. How much would you expect the socks to cost at the end of 1 year in light of the expected inflation? d. Use your findings in parts b and c to determine how many socks (fractions are OK) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer socks can Z the end of 1 year? e. What is Zane's approximate real rate of return over the year? How is it related to the percentage change in Zane's buying power found in part d? Explain.
Real and nominal rates interest Zane Perelli currently has $96 that he can spend today on socks costing $2.40 each. Alternatively, he could invest the $96 in a risk-free U.S. Treasury that is expected to earn a 8% nominal rate of interest. The consensus forecast of leading economists is a 4% rate of inflation over the coming year. a. How many socks can Zane purchase today? b. How much money will Zane have at the end of 1 year if he forgoes purchasing the socks today and invests his money instead? (Ignore taxes.) c. How much would you expect the socks to cost at the end of 1 year in light of the expected inflation? d. Use your findings in parts b and c to determine how many socks (fractions are OK) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer socks can Z the end of 1 year? e. What is Zane's approximate real rate of return over the year? How is it related to the percentage change in Zane's buying power found in part d? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Real and nominal rates interest Zane Perelli currently has $96 that he can spend today on socks costing $2.40 each. Alternatively, he could invest the $96 in a risk-free U.S. Treasury security
that is expected to earn a 8% nominal rate of interest. The consensus forecast of leading economists is a 4% rate of inflation over the coming year.
a. How many socks can Zane purchase today?
b. How much money will Zane have at the end of 1 year if he forgoes purchasing the socks today and invests his money instead? (Ignore taxes.).
c. How much would you expect the socks to cost at the end of 1 year in light of the expected inflation?
d. Use your findings in parts b and c to determine how many socks (fractions are OK) Zane can purchase at the end of 1 year. In percentage terms, how many more or fewer socks can Zane buy at
the end of 1 year?
e. What is Zane's approximate real rate of return over the year? How is it related to the percentage change in Zane's buying power found in part d? Explain.
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